Glass Ceiling Effect: Application of Game Theory and Economic Ramifications

family firms, while the North American family firms outperformed their sector peers by an average of 130 basis points per year during the same study period. This consistent long-term performance of family firms may be attributable to their superior financial performance driven by their long-term orientation. However, it is noted that family firms seem to underperform their sector peers over short periods (e.g., second half of 2008, second half of 2013) in which overall economic and market conditions are overtly positive. Such an underperformance of the family firms when the market sentiments are highly positive may be attributable to the conservative/defensive corporate policies they adapt compared to their nonfamily peers. These defensive policies include maintaining conservative balance sheets (higher profit margins and lower gearing ratios).

Operating and financial perfor mance:

What are the drivers of family firms’ superior performance? During 2006 – 2020 period, the sample family firms report superior revenue growth led by their management’s long-term investment horizon. They report greater revenue growth rates, superior operating profit margins, and more consistent emphasis on innovation activities than their non-family counterparts. On the sector adjusted basis, family firms across the regions generate consistent top-line growth, laying the foundation for superior overall financial performance. In addition to their higher topline growth, family firms generated greater operating margins. Their sector adjusted EBITDA margin has been on an average 190 basis points (per year) higher than their non-family counterparts. An average family firm also reports to use lower debt financing than an average non-family firm. The evidence suggests that family owned firms have significantly lower gearing ratios in all the regions except North America in 2017. At the same time, I note that the credit quality of family firms is observed to be better than the nonfamily firms. This has been the case throughout the study period. I argue that such a lower gearing ratio provided the greater insulation for the family firms during all the recent adverse market conditions. Further, the lower prevailing debt financing helped these family firms to reduce the gearing quickly during the early years of post-crises periods. The underlying questions still remains. Why do family firms report better revenue growth and profitability than their non-family peers? The data suggest that family firms annually spend significantly higher than their annual depreciation expense on their capital expenditure. This ratio of capital expenditure as percentage of depreciation continues to be higher throughout the study period in the case of family firms. Further, family firms report to spend more of their sales revenue on innovation activities. This seems to be the situation across all the regions and industries. The available evidence clearly supports the long-standing argument of family firms’ longer-term investment philosophy. Such an investment focus, offers the family firms with greater flexibility to focus on long term growth instead of short-term quarter-to -quarter earnings growth.

Corporate Gover nance:

As I mentioned earlier, the presence of controlling shareholder in the firm’s upper echelon better aligns the managers’ and shareholders interests. At the same time, available literature on family firms also suggest that controlling shareholder may either directly indulge in the expropriation of corporate resources or embark on the suboptimal corporate decisions to safeguard their control. These activities of controlling shareholders are detrimental to the minority shareholders’ interests. Such ‘principal-principal agency problems’ can be more pronounced if the founder or

the extended family owns special voting rights in the corporate decisions. In other words, the presence of special voting rights for the family may adversely affect the minority shareholders’ interests. The recently published statistics by the Credit Suisse help me to comment on the potential impact of family’s special voting rights on the wealth of the ordinary shareholders.

The available evidence suggest that the concerns raised by the earlier studies about the ill effects of family firms with the special voting rights are visibly misplaced. It is reported that the family firms with special voting rights have outperformed the family firms where the family’s shares rank the same as that of the ordinary shareholders. This evidence seems to be true across all the jurisdictions with the provision of different classes of equity securities. With the support of this evidence, I tend to argue that families with the special voting rights have greater long-term focus than the families with controlling ordinary share holding. This is because shares with the special voting rights across the world have lower liquidity in the financial markets leading to their custodians to have a long-term perspective on the growth of their investments.

ESG Compliance:

Across the world, there is an increasing focus on environmental, social, and governance investing. The Credit Suisse’s study notes that an average family firm reports better overall ESG compliance than an otherwise similar non-family firm. Overall, European family firms report better ESG scores than the Asian and North American family firms. It is also observed that family owned firms, despite their better overall ESG score, underperform their peers in the governance aspects. This observation complements the perception in the financial markets that controlling shareholders may exploit the minority shareholders in the family firms. For the further details, I direct the reader to the below mentioned references.

References

1.The Family Business Model – 2015: Credit Suisse Research Institute

2.The CS Family 1000 - 2017: Credit Suisse Research Institute

3.The CS Family 1000 - 2018: Credit Suisse Research Institute

4.The Family 1000: Post the Pandemic – 2020: -